When To Save, and When To Invest
Growing up, you probably heard from your parents "You need to save your money! Don't forget to save some!" And guess what: they're right, to a point. But America also has a savings and investment crisis.
Today, in a world where millennials have just emerged from their third "once in a generation" economic collapse, Russia has invaded the Ukraine because....reasons(?) and inflation is eating away at your paycheck like Pac-Man on a bender, it's never been more important to optimize how you save your money, and how to invest your money.
In this article, I'll cover the best rules of thumb as to when you save your money, and when you invest it, as well as how to invest because that shit is COMPLICATED. Let's start with when you should save your hard earned cash.
When To Save Your Money
The whole point of saving your money is to have, well, money in savings. Meta, amirite. Savings help you avoid the paycheck-to-paycheck lifestyle that most Americans suffer from. It's there to cover you in an emergency so you don't have to put it all on a credit card, or to allow you to sleep better at night knowing you're not living on the razor's edge of your financial life. But how do you figure out how much to save?
How Much Money Do I Save?
Most experts recommend that you have between 6-12 months of savings in a separate savings account. However, those experts that tell us that tend to be older and more established, not knowing what it's like to be a millennial working as an Uber driver/barista that lives on tip wages while paying $2,000 a month for their apartment and $200 to OnlyFans.
In my piece "6 Steps for Financial Independence: The Playbook Made for Millennials," I recommend that you start small. Start by opening a new account for emergencies and make it to $500 in that account. That $500, while it seems like not a whole lot of emergency cash, is super important. You'll be amazed by how much stress it removes from your life, and how much better you sleep.
That $500 will also give you the foundation you need to build to whatever amount you're comfortable with. Personally, I like over 6 months expenses located in a separate account that exists for emergencies only. No vacations, no Gucci sandals, no extra coffees each week. This is for if I lose my job or my dog gets sick or my wife declares war on my garage door with her car (again).
But where do you actually put this money?
How To Save Your Money
Chances are, if you look at the savings account options at your current bank, you'll vomit in disappointment and embarrassment thanks to the paltry savings rate they offer. For example, here's the current rate from Truist:
Translation: for every $100 you deposit in this account, you'll receive one penny in earned interest each year. That's almost criminal. So what are you supposed to do?
High Yield Savings Accounts
The good news is that you have a few options. The first is called a "high yield savings account," which you'll typically see referred to as an HYSA. An HYSA is offered by primarily online-only banks like Marcus, Ally, American Express and the like. I personally use Marcus to keep my money safe, and you can qualify for a promotional rate of 0.70% for your first 6 months when you open a new account with them using my code. That's 70x the national average!
FinTech Savings Accounts
There are also other FinTech competitors that offer similar rates, with fun twists. Stash offers a checking product that produces "stock back" on each purchase, rather than cash back, which can help you build a semi-liquid savings account rather quickly (depending on stock and market performance),
Albert offers a "savings" account that gives you little bonuses based on the amount you've saved in your accounts, and lets you set goals to make you feel better about yourself. Here's a full write-up on Albert in case you're interested!
Yotta Bank offers a sweepstakes-type game where it incentivizes you for saving. Each $25 of deposits gives you one raffle ticket, which is entered into a drawing to win up to $10 million each week. Even if you don't win, you're still getting a 0.20% interest rate, which again is better than most banks you'll find.
Stablecoins
This one is 100% the least relatable on this list, but hear me out. Stablecoins are cryptocurrency tokens pegged 1:1 to the U.S Dollar. This means, unlike Bitcoin or Ethereum, their prices do not appreciate or depreciate over time, making them a stable (get it?), reliable asset. These tokens are used by exchanges to generate liquidity which they can lend out to borrowers or institutions at a high interest rate. In turn, they offer you a high APY as an incentive to keep your tokens on the platform. For a more in-depth breakdown, check out my piece on cryptocurrency passive income.
I currently use Gemini to keep my stablecoins, and the return is impressive. I'm in the process of converting my emergency fund into Gemini Coin, which is currently offer an 8.05% APY at time of writing. However, this is subject to change whenever the platform wants to change it, and it could also go away overnight if the federal government were to step in.
When To Invest Your Money
OK, checklist time. You've:
Budgeted and figured out how much you spend
Started your HYSA and have built up 6 months (or more) worth of emergency savings
Now what? Now it's time to invest! Investing is by far the easiest, most approachable way to build your wealth over time. You just need to know how to get started.
It's also worth noting that each person's investing style is different, so please consult a professional for your individual situation.
How To Invest Your Money
Investing your cash can take many different forms: stocks, bonds, ETF's and index funds, and even alternatives like cryptocurrency or NFT's. Each investment brings with it different levels of risk associated with it, as well as different levels of potential returns.
To get started, you need to open an investment account. The first account you should open is a retirement account like a 401(k) or 403(b), which is something offered via your employer. Many employers match your contribution up to a certain amount, and the contribution comes out pre-tax, lowering your taxable income. It's a win-win.
The next account to open is a Roth IRA. A Roth IRA is another retirement account that kind of works backwards to a 401(k): your money is contributed after taxes, but grows tax free until you're 59 1/2 years old. Then, you can take it out with no penalty! This is basically a legal tax shelter, and billionaires use this avenue to grow their insane wealth to even more insane levels without having to pay tax on it.
Finally, take a look at a taxable brokerage account. There are a TON of options now for taxable brokerages, from established names like Fidelity and Schwab, to start-ups like M1 Finance, Stash Invest or Robinhood. I personally like Robinhood thanks to the user interface, and you can get a free stock valued up to $200 by using this link.
If you want to invest in cryptocurrency, you can open an account on any cryptocurrency exchange to get started. I would go with the more established names (Crypto.com, FTX, Coinbase and Gemini) as they have the necessary liquidity and reputation to feel comfortable using them. If you want to open a new account on Coinbase, you can use my link to get $10 in free Bitcoin, just for signing up!
Why Should I Invest My Money?
The reason you should switch from saving money in a savings account to investing your money is compounding interest, the eighth wonder of the world apparently according to Albert Einstein although I'm pretty sure he didn't say that.
What Is Compounding Interest?
Compounding interest is what happens when your money makes more money. Each dollar invested is recruiting other dollars, and those dollars recruit other dollars until you have a dollar army that can march on any sovereign nation in the Eastern Bloc.
Compounding interest is a genuinely magical concept. Let's take our two concepts from this piece, an HYSA and a taxable brokerage account, as examples.
Let's say you're 20 years old and your parents have just given you $10,000. You have a choice: putting it in an HYSA that yields 0.50%, or investing in an index fund that returns 8% per year. You want to put this money in there and then never touch it again, and you want to let it grow until you're 60 years old. Here's how that breaks down -
High Yield Savings Account
Invested In An Index Fund
By investing that money, rather than leaving it to rot in a savings account, you have made $205,000 over that 40 years. That also doesn't account for inflation, which eats away at your money each year. That means that the $12,208 you'd have in your savings account in 40 years will actually be worth less than the $10,000 is today. Just wild stuff.
The Bottom Line
In the example above, the power of compounding interest is on full display. However, that's not to say that saving money is worthless. When you save your money in an HYSA, your goal should be to have enough liquid cash to tide you over, should an emergency arise. If something bad happens, you don't want to have to put it on your Platinum Card. Why? Because compound interest also works in the other direction! Credit card debt can pile up and leave you in a far worse position than you were before, so don't forget to have that side account ready and willing to be called up should you ever need. it!
Thanks for checking out today's piece, and don't forget to sign up for your FREE stock at Robinhood and your FREE Bitcoin thanks to our friends at Coinbase. Good luck with your saving, investing and hopefully you're compounding your interest!
